06.10.2020 Финансы, банки

Market Signals 10.06.2020

INVESTMENT IDEAS

Today we will look at one debt securitiy as investment ideas for this week: Turkey's senior unsecured sovereign Eurobond
IDEA #1: Turkey's senior unsecured sovereign Eurobond

Against the backdrop of growing global risk appetite in 2019, Turkey's senior unsecured sovereign Eurobond due in 2030 rose in price quite actively along with other EMs. However, at the peak of the sell-off that swept the global trading floors in the first decade of March 2020, the yield on the issue soared to near double digits. As the situation on the world markets stabilized by the beginning of June, the yield on the security corrected by the beginning of June 2020 to 6.4%. It would seem that it is high time to go (along with other EMs) to conquer the levels noted on the eve of the pandemic (5.5%), however, this did not happen.

The fact that the paper is trading at levels that, at first glance, are not too far from their dock-like levels, can create a deceptive impression of its relative well-being. Indeed, such a moderate underestimation, for example, could be attributed to the fact that the global demand for risk has not yet fully recovered in individual names. However, it is not the yield of the issue that is more indicative, but its credit spread, which is now at its highs over the past 15 years (see the chart below). The fact is that the current crisis has not only exposed the not very high credit quality of the issuer, but also worsened it. It must be said that investors, presenting an increased demand for risk in developing countries last year, apparently fully realized this, however, in the pursuit of high yields, the market largely turned a blind eye to this. Now, given the not yet fully recovered global appetite for risk, the deterioration of the issuer's credit quality is hard to ignore. In addition, investors have to take into account the geopolitical background around the issuer, which has been quite volatile recently. This led to an increase in the premium for investment in this instrument and its corresponding downward revaluation.

Speaking about the deteriorating credit position of the issuer, first of all, we note the situation with foreign exchange reserves, which have decreased by $ 35 billion since the beginning of 2020. True, this decline was to some extent offset by the growth of gold reserves. However, in the conditions of a stable departure in 2020, the current account balance of the balance of payments in the negative area, Turkey has to spend reserves to maintain the lira, as a result of which its gold reserves have decreased by about 20% ($ 20 billion) over the past six months. At the same time, given, for example, the negative impact of the pandemic on the tourism industry, the current account balance may remain negative, which means further pressure on reserves.

It must be said that Turkey's financial account of the balance of payments is under pressure in 2020. In an attempt to curb capital outflow, the Central Bank even recently took a step that is quite nontrivial in the current global macroeconomic context - it raised the 1-week repo rate by 200 bp at once. p. up to 10.25%. This was argued that inflation exceeded expectations, however, in reality, it looks more like an attempt to contain the currency crisis. As a result of attempts to support the economy with cheap money (the rate was lowered from 12% at the end of 2019 to 8.25% in May 2020) at double-digit inflation rates, the real interest rate in Turkey went into a deeply negative zone (-3.75 p. . P.). In combination with a fairly large external debt and a negative current account balance, this put pressure on the foreign exchange market (the Turkish lira against the dollar has fallen by more than 20% since the beginning of the year), and attempts by the monetary authorities to restrain this process with the help of foreign exchange interventions only led to depletion of foreign exchange reserves. However, even after the sharp increase in the rate, the real interest rate in Turkey remains in the negative zone, which creates risks for financial stability.

The deterioration of the issuer's credit position did not escape the attention of the largest international rating agencies. In August 2020, Fitch downgraded Turkey's rating outlook from stable to negative, keeping it at BB-. On September 11, 2020, Moody’s agency not only downgraded the rating of Turkish sovereign debt in foreign currency to the lowest level since the early 1990s. - B2, but also retained a "negative" outlook for it. Moody’s analysts expect a crisis in Turkey’s balance of payments, which may prompt the government in an attempt to preserve the gold reserves to impose restrictions on the outflow of foreign currency, which, according to the agency, will also affect the interests of holders of the republic’s sovereign foreign currency debt.

The rise in credit risks around Turkey led to a twofold increase in insurance against default (5-year CDS) in 2020 to 550 bp. According to this indicator, Turkey is a kind of leader among the largest developing economies. The current crisis has led to a reassessment of the risk of an issuer default by 3-4 pp upwards. Note, in accordance with the Bloomberg risk model, the main risks for the issuer are concentrated in the period up to 5 years. Thus, the probability of Turkey's default over the next 5 years is now 23%, while the issue with maturity in 2030 will be in default with

Alexey Shternshis
Joint Managing Director
Capital Pi

https://capitalpi.fund/market-signals-201006